Emami. Initiating Coverage Ayurvedically hedged. Rating CMP. Target. Buy. Rs Rs. 434

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1 Initiating Coverage Ayurvedically hedged Despite large FMCG players still struggling to come to terms with the evolving Indian consumer, players like Emami(HMN) had brilliantly decoded the Indian consumer needs and wants more than two decades earlier. Emami has not only managed to sustain market leadership against the strong, cash rich MNC/domestic counterparts but also managed to pioneer various niche categories in India. Determined to take the otherwise premium Ayurvedic/herbal ormulation to a mass platorm, HMN ventured into categories that were low in penetration and high in margins. The Ayurveda/herbal platorm enabled them to oer innovative and niche products that were devoid o high competitive intensity. Another notable growth propeller has been eective use o celebrities in brand promotions. Further, clearly understanding on how to market to the mass end o the consumer pyramid, HMN unleashed heavy celebrity endorsement on several o their brands. Over the years, the combination o right products and integrated marketing has enabled HMN to develop a well diversiied portolio with strong leadership in several under penetrated categories guarding them well against any volatility. Penetration potential in the key categories, brand extensions o the power brands and growth opportunity in the Zandu portolio, keeps us excited on Ayurvedically hedged Emami. We initiate coverage with a BUY rating and a Price O (16% upside to, ~21x FY16E EPS) Investment rationale Low penetration in the key categories: Emami has built strong brands around categories that have minimal penetration and have immense potential to become large. Diversiying into new unexplored categories backed by strong celebrity endorsements have enabled HMN to maintain market leadership in these categories despite competitive intensity inching up. We believe HMN would be the key beneiciary as these niche categories expand to become larger propositions. Brand Extensions: HMN currently has 4 power brands in Navratna, Boroplus, Zandu and Fair & Handsome. With these brands having become household names, we believe brand extension opportunities into complementing categories presents an exciting growth opportunity. Zandu Portolio: The acquired Zandu portolio came with the immense growth and brand extension opportunities. Strong Ayurveda platorm o HMN coupled with Zandu brand should enable HMN to command a signiicant presence in the niche herbal OTC market. Inorganic Growth opportunity: Armed with Rs.~5bn cash in hand, HMN is well placed to scout or inorganic growth opportunities and also assures a healthy dividend payout in the interim. Financial summary Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) ROE (%) FY14E 18,738 4,417 3, % FY15E 21,781 5,215 4, % FY16E 25,294 6,132 5, % Date Mar 27, 214 Market Data SENSEX 2255 Nity 6584 Bloomberg Shares o/s Market Cap Initiating Coverage HMN IN 227mn Rs. 98bn 52-wk High-Low Rs m Avg. Daily Vol Stock perormance (%) Rs. 76mn Index member BSE 2 Latest shareholding (%) Promoters 72.7 Institutions 18.7 Public 8.6 1m 3m 12m Emami -7% -1% 11% Sensex 5% 4% 18% BSE FMCG 7% 6% 18% Tejash Shah tejash@sparkcapital.in Gnanasundaram S gnanasundar@sparkcapital.in Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset 1

2 Executive Summary Corporate Factsheet Company Background Presence Management depth Corporate Structure Emami commenced its operations in 1974, when Mr.RS Agarwal and Mr.RS Goenka set up a cosmetics manuacturing unit in Kolkata, as a partnership under the name o Kemco Chemicals. Kemco acquired the ailing Himani Ltd, another cosmetics and toiletries company based in Kolkata, in Kemco changed its name to Emami Ltd in 1995, and merged with Himani in Emami Ltd was a private company until 24, when it went public. In October 28, Emami Ltd acquired a controlling stake o 65% in Zandu Pharmaceutical Works Ltd, and in June 29 Emami Ltd merged Zandu Pharmaceutical into itsel, adding to its portolio Zandu s brands viz. Zandu Balm, Zandu Chyawanprash and Kesari Jivan. Pan India presence with ~3 distributors, ~56 sub-distributors and ~4mn retailers. 25 products sold in over 6 countries internationally Promoter Directors: Sri R. S. Agarwal, Sri R. S. Goenka, Sri S. K. Goenka, Sri Mohan Goenka, Sri A. V. Agarwal, Sri H. V. Agarwal, Smt. Priti Sureka Independent Directors: Sri K. N. Memani, Sri Y. P. Trivedi, Sri P. K. Khaitan, Sri Amit Kiran Deb, Sri S. B. Ganguly, Vaidya Suresh Chaturvedi, Sri Sajjan Bhajanka, As o March 213, Emami had ive subsidiary companies: (1) Emami UK Ltd [1% holding], (2) Emami Bangladesh Ltd [1% holding], (3) Emami International FZE [1% holding], (4) Emami Overseas FZE [1% holding], (5) Pharma Derm S A E Co, Egypt [9.6 % holding], Revenue Model Domestic 84% ; International 11% & CSD 5% Key Success Factor Billion Rs. Brands Manuacturing Facility International Operations Mass Positioning - aordable and everyday use oerings. Boro Plus, Zandu Balm, Himani Navratna, Emami Fair & Handsome 7 manuacturing acilities situated across India in addition to one in Bangladesh. 45% SAARC, 2% GCC, 13% CIS, 9% Arica, 14% Others Employees ~25 as on March 31, 213 Credit Corporate Bankers IPO Bankers Auditors Rated PR1+ (by CARE) - highest rating or short term borrowings. CARE AA+ or long term borrowings Canara Bank, ICICI Bank Ltd., State Bank o India, HDFC Bank, HSBC AnandRathi Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset M/s. S.K. Agrawal & Co 2

3 Emami Timeline Mr.RS Agarwal and Mr.RS Goenka set up Kemco chemicals Acquires Himami ltd, 1 year old company with strong brand equity in East India First lagship brand Boroplus Antiseptic Cream under the Himani Navratna Cool Oil came in the late eighties under the Himani Umbrella. Taking one step at a time Emami went overseas. Kemco Chemicals, partnership irm converted into Public Limited Company as Emami Ltd Emami Ltd was merged with Himani Ltd and its name was changed to Emami Ltd Launch o Sona Chandi Chyawanprash with high decibel celebrity endorsement promotions First time in brand history that an endorser co-owns a brand. Beauty secrets by Madhuri range IPO - Lists on the BSE, raises Rs. 35mn. Created a completely new category by introducing India s irst men s airness cream Emami extends the Boroplus brand to Cool talc, Paras and Heinz other players in the segment Emami concludes takeover o Zandu, acquires 72.8%, Zandu Business restructured, Zandu healthcare division merged with Emami Raises Rs. ~3bn through FPO Starts its irst ever oshore manuacturing unit in Bangladesh. Extends Fair & Handsome into ace wash segment 3

4 Emami Domestic Operations 7 production acilities in India and One in Bangladesh Emami s key strength has been its strong power brands Power Brands (~7% o revenues) Brands Others (~26% revenues) Healthcare portolio (~4% o revenues) Vapi, Gujarat Pantanagar, Uttarakhand Guwahati, Assam (2 acilities) 1. Navratna cooling oil 2. Boroplus Antiseptic cream 3. Emami Fair & Handsome 4. Zandu & Mentho balm 1. Navratna Cool talc 2. Boroplus Cool talc 3. Fast relie 4. Chyawanprash, 5. Malai Kesar 6. Boroplus Lotion 7. Vasocare cream 1. Zandu Vigorex, 2. Zandu Lalima 3. Zandu Pancharrishta 4. Zandu Nityam Silvassa, Dadar & Nagar Haveli Talasari, Maharashtra Kolkata, West Bengal Emami s key strength has been its strong power brands Boroplus Antisepti c cream Boroplus Powder Zandu & Mentha balm Navratna Cooling hair oil Chyawan prash Fast Relie Fair & Handsom e Navratna Cool talc 4

5 Emami Domestic Operations Navratna Oil Power Brands Zandu Balm and Mentho plus Boroplus Antiseptic Cream Fair & Handsome Navratna Cool talc Emami Fast Relie Zandu Healthcare Revenue Share ~25% ~17% ~17% ~1% ~4% ~1% ~4% Category Cooling hair Oil Pain Balm Antiseptic Cream Mens Fairness cream Prickly Heat Powder Pain relie OTC,Ethical Market share ~55% ~58% ~74% ~58% ~18% ~4% na Market size Rs.~81bn Rs.~7bn Rs.~36bn Rs.~33bn Rs.~43bn Rs.~1bn na FY1-13 Value CAGR ~21% ~19% ~16% ~19% ~5% ~9% na Competitor Himgange, Marico GlaxosmithKline consumer, Amurtanjan, GD Pharma, Reckitt Benckiser, J&J Hindustan Unilever, L Oreal, Beiersdor Heinz, Reckitt Benckiser GlaxosmithKline consumer, Amurtanjan Dabur Competitor brands Thanda Tel, Coconut cooling Iodex, Amurtanjan Boroline, Itchguard Fair & Lovely Men, Garnier Men, Nivea Men Nycil, Dermicool Iodex, Amurtanjan Dabur Pricing Power High High High, minimal RM impact Low, Intense competitive scenario Low, Intense Competitive scenario High, Minimal RM impact High Source- Company, Spark Capital Research 5

6 Emami Revenue drivers Growth unction o () Weightage Outlook Low penetration Most o the categories where HMN operates are o low penetrated, oering the huge category growth potential. E M A M I Volume Otakes Increasing usage Increasing usage via distribution increase to also lead to category growth. r e v e n u e g r o w t h Pricing power Market leadership Low MNC competition HMN s strong market leadership in power brand categories provides them with the strong pricing power leading to value growth. Majority o the categories that HMN operates have minimal MNC competitive threat d r i v e r s Mix improvement Niche categories Brand Recall Increasing contribution rom niche categories which have higher margins Plethora o celebrities endorsing various brands have given HMN brands a strong recall and pricing power Source: Spark Capital Research - Strong - Weak - Positive - Negative - Neutral 6

7 Emami Margin drivers Margin unction o () Weightage Outlook Mentha oil Mentha oil prices are expected to be subdued given the low demand pressure or menthol E M A M I M a r g i n Input Costs (~42% o sales) A&P expenses (~16% o sales) Others (LLP, HDPE) Support to new launches Promotional expenses Other raw materials are expected to slightly increase in the near term Advertisements to support orthcoming launches to pressurise margins. Promotional expenses and discount to distributors to remain in control. d r i v e r s Other Operating expense (~21% o sales) Employee cost Other Operating expenses Employee cost as a % o sales to remain constant Minimal scope or operating leverage Source: Spark Capital Research - Strong - Weak - Positive - Negative - Neutral 7

8 Emami The Success Formula # 1 Diversiied portolio # 2 Market leadership in power brands enabling extension # 3 Clever and conservative strategy in shaping growth # 4 Attracting least competition rom MNCs # 5 High A&P outlay backed by celebrity endorsements # 6 Healthy cash generation enabling inorganic growth opportunities = Strong economic moat in the existing business model Drivers o Future Growth Emami, has made its intentions clear by staying in niche portolios that have tremendous growth opportunities given their lower penetration and increasing preerence towards herbal ormulations. Further brand extensions to complimentary categories to assist growth. V o l u m e O t a k e Source Spark Capital Brand Extension power brands Category Expansion in power brand categories Zandu Portolio growth P r I c i n g P o w e r Emami assumes market leadership position in the key categories it operates in, Most o the categories they operate attracts minimal MNC competition too. Hence assisted by strong brand led market leadership and low competitive intensity, Pricing power in key categories remains strong. 8

9 Soap Wash Powder Detergent Hair Oil Toothpaste Shampoo Talcum Powder Cooling Hair Oil Fairness Cream Antiseptic Cream Cold Cream New Market Present market Emami #1 Diversiied Portolio - Young, contemporary yet mass appealing New markets have been the way until now, diversiying oerings leading to power brands contributing ~7% o revenues Existing brand Market penetration Market Development New brand Brand Development Diversiication Himani Fast relie 1% Navratna talc 4% Fair and handsome 1% International business 11% Navratna oil 25% others 15% Zandu and mentho plus balm 17% Boroplus antiseptic 17% 1% Growth to be a Penetration led opportunity in power brand categories to be a key long term growth driver 8% 6% 4% 2% % 95.7% 92.3% 88.6% 74.5% 72.8% 6.4% 51.% 28.% 18.6% 1.6% 1.1% Jack o all trade; Master o all trade Emami holds a unique portolio o brands that caters to the needs o the urban and rural consumer alike. Many o the brands are positioned to address niche needs with roots o herbal in it, making them instantly attractive and mass appealing. Association with herbal platorm has given the brands a massive trust appeal. With brand risk spread across product baskets, we believe that HMN is well hedged to cover any category speciic slowdown. Given that penetration is low in most o the categories it operates in, strong category led growth to be a major revenue driver in long term. With no brand commanding disproportionate revenues share, we see that HMN brand risk is minimal in case o catastrophic developments in any particular category. 9

10 #2 Strong market leadership - Innovative launches enabled edge Strong market leadership in niche categories 8% % 6% 5% 4% 74% 3% 55% 58% 58% 2% Number o players occupying 2/3 rd market share in power brand categories limited indicating the strength o the brands % 18% 4% % Boroplus Antiseptic Navratna Oil Fair & Handsome Zandu & Mentha Balm Navratna Cool Talc Emami Fast Relie Boroplus Antiseptic Navratna Oil Fair & Handsome Zandu & Mentha Balm Navratna Cool Talc No threat to the leadership status in power brand categories, despite competition intensiying o late 9% 8% 7% 6% 5% 4% 3% 2% 1% % 4% 74% Boroplus Antiseptic Cream 29% 3% 3% 55% 58% 58% Navratna Oil Fair & Handsome Zandu & Mentha Balm 35% 18% Navratna Cool Talc First come; strong leadership With HMN being the category innovator in most o their key categories, HMN holds an unassailable market leadership in these categories. The strong leadership has also dissuaded several plyers rom entering the category acting as a strong entry barrier. Even in categories where MNCs have shown tremendous interest, HMN has displayed strong market resilience to protect its tur. The niche proposition has not only limited competition but also given HMN unlimited pricing power. Emami Competitor 1 1

11 #2 Strong market leadership - enabling category extension Given the strong brands, diversiication opportunities galore Fair & Boroplus Navratna Zandu Chywanprash Handsome Antiseptic cream Cooling Hair Oil Fairness cream Pain Balm Wellness Strong brands present exciting category extension story Emami has created plethora o strong brands assisted by high A&P. Emami, a company with one o the highest spending behind celebrity endorsement, has created strong grass root level recall or its brands. Cold cream Moisturizer Heel repair Sunscreen Antimark cream Source: Spark Capital Research Cooling talc Talcum powder Light hair oil Deodorant Styling Gel Face wash Shaving cream Atershave lotions Facial masks Face scrubs Headache solution Cough medications Cold treatments Digetive capsules Herbal syrups Adult Nutritional drinks Digestive candy The brands now having become household name across, these brands present exciting opportunity to expand into complementing categories. We have already witnessed Boroplus being extended to cold creams and Fair & handsome brand being extended into ace washes. Though we do remain apprehensive o management being cautious to rapid expansion earing intense competitive scenario, we acknowledge that the brands have nevertheless evolved to being associated with more than single category. The acquired Zandu brand too promises exciting opportunity given its niche presence in the Indian OTC market. Categories HMN is already present in Potential categories 11

12 #3 Clever & Conservative strategy - Mass oerings leveraging Herbal/Ayurvedic platorm Leveraging Ayurvedic/herbal platorm Marketable mass priced oerings We see that Emami has always preerred launching oerings where competition was least or the category was unexplored. This diversiication strategy has enabled them to cement strong and innovative brands which provide huge margin leverage as competitive intensity in these categories generally tend to remain minimal. High Margins Low Competitive Intensity Low penetrated categories Key to Emami s success has been oering niche/herbal ayurvedic products at mass price points. Throwing open a new mass herbal market. As consumer needs have started turning niche and herbal, Emami portolio is all set to beneit rom this shit in consumer pattern towards premium and healthy oerings. Innovative and Eective products Emami Niche Product Categories 12

13 #4 Avoiding the clash with the Titans Minimal threat rom MNC FMCG players; Strategically, David is avoiding the Goliath Brand Contribu tion to revenue Market share Key segments Reckitt Benckiser Hindustan Unilever Market Share (%) L'Oreal Beiersdor Heinz Amway J&J GSK Boroplus Antiseptic ~17% 74.% Antiseptic Cream 4% % - Navratna Oil ~25% 55.% Cooling Oil Fair & Handsome Zandu Balm & Mentha balm Navratna Cool Talc Emami Fast Relie Emami Vasocare lip cream Malai Kesar Cold cream ~1% 58.% Mens Fairness Cream 3% 5% 2% ~17% 17.% Analgesics 11% % ~4% 18.% Prickly Heat Powder 3% % ~1% 4.% Analgecis 11% % ~1%.1% Lip Care - 3% 13% ~1% 1.5% Body Moistruizer - 5% - 4% - 14% - - Boroplus Advanced moisturizer Sona Chandi Chywan Prash, Kesar Jivan & Zandu ~1% 3.% Body Moisturizer - 5% - 4% - 14% - - ~5% 4.% Dietary Supplements Source: Company data, Industry Source & Spark Capital research % 19%

14 Rs.Bn % o sales Rs.bn % o sales Emami #5 Steady commitment to brands- High A&P spend ensuring the market edge Despite A&P spends as a % o sales rationalizing o late in % o A&P spend to sales, HMN ranks the highest % 19% 19% 18% 16% 16% 15% 16% 15% FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Advertisement & Sales Promotion % o sales 25% 2% 15% 1% 5% % % % 15.5% % 13.% 12.2% % Emami HUL Colgate Dabur Marico GCPL Jyothy Labs A&P expenses % o sales 14.5% 1..9 Bajaj Corp 18% 16% 14% 12% 1% 8% 6% 4% 2% % Innovative, attractive and creative proposition on the oreront Celebrity endorsement has been a key actor driving brand recall Movie marketing Rajesh Khanna acts as Emami CEO in the movie Agar Tum Na Hote in 198s (One o the irst ew movie co-branding initiatives) First time in brand history that an endorser co-owns a brand. Beauty secrets by Madhuri range Launches Fair & Handsome, India s irst airness cream or men with Shah Rukh Khan as its brand ambassador Superstar Amitabh Bachan, roped in to market all its Ayurveda brands, Amitabh and Ayurveda seemed to be a match made in heaven. Roping in regional superstars or promotion o brands in the regions, Actor Surya in Tamil Nadu and Chiranjeevi in Andhra Pradesh Ropes in Pt. Biju Maharaj and Milkha Singh or promoting Zandu Kesari Jivan Product Navratna Cooling Hair Oil Boroplus Antiseptic cream Zandu/Mentho Balm Fair & Handsome/ Navratna talc/ Boroplus Fast Relie Chyawanprash Celebrity Endorsing the brand Amitabh Bachan, Shahrukh Khan, Mahesh Babu, Surya, Jr.NTR Sonakshi Sinha, Amitabh Bachan, Kareena Kapoor Malaika Arora Khan, MS Dhoni, Pt Birju Maharaj, Jr.NTR, Surya, Shah Rukh Khan Amitabh Bachan, Gautam Gambhir, Vijender Singh, Saina Nehwal, Mary Kom, Sushil Kumar Milkha Singh, Shah Rukh Khan 14

15 Rs.bn Margin (%) Price Per KG Emami #6 Subdued Mentha Oil prices provide short term margin trigger Gross Margin has stabilized over the past ew years As mentha oil prices have largely remained subdued % 63.3% 62.5% 61.4% 59.8% 58.8% 57.9% 56.5% 58.% 56.9% FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e 64% 62% 6% 58% 56% 54% 52% Gross Proit Gross Margin Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research LLP and vegetable oil prices though are slightly on the higher side Imported raw material minimal, keeping $ related risk low Others 8% Other Packing Materials 16% Oils & Essential Oils 21% Imported 1% Herbs 3% Tubes & Containers 19% Chemicals & Fats 33% Indigenous 99% Source: Company data, Spark Capital Research 15

16 Mentha Oil prices Emami #6 Subdued Mentha Oil prices provide short term margin trigger Mentha Oil Salience Mentha oil crop sowing season starts during February March every year. The crop harvesting is done during May & June. The manuacture o menthol lakes orm de-mentholized oil has been taken up on a commercial basis by a ew irms in Delhi, Mumbai, and Gujarat. Major Mentha oil markets in UP are Chandausi, Sambhal, and Barabanki India is the largest producer and exporter o menthe oil in the world. At present the major producers o mint oil in the world are India, China, Brazil and the US. Area under cultivation is ~.21mn hectares vs.17 last year leading to increased production o ~6 tonnes Vs ~5 last year, Despite increased demand rom pharmaceutical industries, average consumption thie year is expected to be around ~3-32 tonnes. Oral hygiene and Pharmaceutical industry major consumers Emami gross margins have historically improved when Mentha prices have been weak % 57% 58% 59% 6% 61% 62% 63% 64% Emami Gross Margin Source: Company data, Bloomberg, Spark Capital Research India remains the largest producer and consumer o Mentha Oil Conectionaries 11% Shaving products 7% Miscellaneous 2% Oral hygiene 28% USA 19% Others 8% India 32% Tobacco 25% Pharmaceuticals 27% Europe 2% China 21% Source: Global menthol review, Spark Capital Research Source: Global menthol review, Spark Capital Research 16

17 Wide distribution spread across the 4 regions Emami reaches out to ~4mn retail outlets Retail Outlets reach (in mn) HUL P&G ITC Dabur Colgate GCPL Nestle Marico Emami Brittannia Bajaj Corp Jyothy Lab Reckitt Benckiser Mondelez India L'Oreal Heinz India Beiersdor J&J GSKCH Zydus Wellness Abbott Wide spread out distribution leads to diversiied revenue base Reaching out North, 3% East, 19% West, 3% South, 21% HMN has ~3 pan-india distributors, ~56 sub distributors and a strong sales orce o over ~2 employees. Direct reach spreading across ~.6mn Indian retailers, tapping huge mass segment with indirect reach to ~4.mn retail outlets Hub-and-spoke model consists o 5 mother warehouses across the country or product storage to counter demand spikes. Project Swadesh drilled Emami s distribution down to rural and isolated population clusters o up to 1,. HMN has been the pioneer in rolling out SAP based vendor collection and order system. HMN had a unctional vendor aligned SAP platorm much beore even most o the MNCs. Management believes this has been a key dierentiator in terms o distribution alignment. 17

18 International operations to remain a low key aair International business currently contributes to ~11% o revenues Given the similar consumer proile, Bangladesh remains a key international market Domestic 84% IMD 11% CSD 5% CIS 13% Others 13% Arica 9% SAARC 45% Commenced its irst greenield international unit in Dhaka, Bangladesh in FY 213. GCC 2% Political instability in Bangladesh and Egypt led to low sales in FY % 6% % % % 1 4% 3% 35% % 6 2% 1% 4 14% 13% -4% 2 % -1% FY7 FY8 FY9 FY1 FY11 FY12 FY13 International Operations revenue (Rs.mn) % yoy growth Low key aair The international marketing division was set up in the Company has a strong presence in over 6 countries Though initial market was limited to Indian diaspora, HMN has developed o local products and new categories Key brands, Navratna, Boroplus, Zandu and Fair &Handsome continue to be popular in most o the international markets. Bangladesh production acility to urther assist in supply. Though ew pockets as Arica and CIS regions continue to exhibit vulnerability, overall sales rom international markets to grow in teens in near term. Bangladesh remains a key market or international operations, sales revival in the subdued macro climate to remain a key monitorable. 18

19 Management tenets Pay scale and holdings BoD payscale (inclusive o perks and incentives) Rs.mn FY9 FY1 FY11 FY12 FY13 Shri R.S. Agarwal, Executive Chairman Shri R.S. Goenka, Wholetime Director Shri S.K. Goenka, Managing Director Shri Mohan Goenka, Wholetime Director Shri Aditya Agarwal, Non- Executive Director Shri Harsha Agarwal, Wholetime Director Smt Priti A Sureka, Wholetime Director Shri Viren J. Shah Shri K.N. Memani Shri Y.P. Trivedi Shri Sajjan Bhajanka Shri Amit Kiran Deb Shri S.B. Ganguly Padmashree Vaidya Suresh Chaturvedi Shri S.K. Todi Shri S N Jalan Shri K.K. Khemka Total % o Operating Income 1.3% 1.1% 1.2%.9%.9% Source: Company Annual Report, Spark Capital Research Promoter Holdings 8% 2.2% 2.7% 2.7% 2.7% 2.7% 7% 6% 5% 4% 3% 7.6% 7.1% 7.1% 7.1% 7.1% 2% 1% % Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Promoter (Indian) Promoter (Foreign) Dividend Pay Out % Adjusted DPS Payout (%) 45.% % 43.3% % 4 3.2% 27.% FY7 FY8 FY9 FY1 FY11 FY12 FY13 6% 5% 4% 3% 2% 1% % 19

20 Management tenets Corporate Governance HMN ocuses its CSR on our areas namely Education, Health, Women empowerment and Environment. In addition, the company also engages in other areas like relie during natural calamities, community welare program, ood or poor program, and house construction or the needy among others. Corporate social responsibility Pending cases against management/com pany As on March 31, 213 the total claims against the company not acknowledged as debt amounted to Rs.18mn. Various promoters directors including Mr.Agarwal and Mr.Goenka who are also the directors o AMRI hospitals were arrested and cases are still pending against them on account o a ire which occurred in December 211 in the AMRI hospital (Kolkata) causing death o 91 people. There had been campaigns against the company by entities including NGO s to remove air and handsome advertisements as it discriminated people on the basis o skin colour. Non Binding Cases/Agitations Though the company is proessionally managed, there is a strong sense o tradition and amilial control in the company dierentiating it rom multinationals and purely proessionally run companies. Degree o Family Control Group companies Wealth Creation MCAP 3 Year MCAP CAGR Emami paper ltd Rs bn -17% Emami Inrastructure Rs mn -24% 2

21 Management tenets Corporate Governance Investor Grievance Total no. o queries/grievances received and attended by the company in the nature o non-receipt o dividend/share certiicate/annual report. FY13 FY12 FY11 FY1 FY9 FY8 FY FY13 FY12 FY11 FY1 FY9 FY8 FY7 BOD/Top Management Total No. o Directors No. o Independent Directors No. o changes in directors over last year Auditors Current auditors o the company Any change in auditors over last ive years? M/S S.K Agarwal & Co. S.K Agarwal & Co. have been the auditors o HMN at least or the last seven years ending March 31, 213. Succession Planning The Company has been honing its second generation o leaders or the past many years. In act out o the seven promoter directors currently, our belong to the second generation all o whom are well qualiied with considerable experience in the company at having held various positions across the past decade. In addition, in an interview in 212 the present ounders Mr. Agarwal and Mr. Goenka also indicated that they would be stepping away rom business in a couple o years which relects the preparedness o the next generations leaders in taking over the reins o the business. Environmental Issues Though the company has exposure to its subsidiaries which are located abroad and any change in regulations/laws can possibly impact the business o Emami, there would be no material impact on Emami Limited(the parent company) as the cumulative revenues or net worth o all overseas companies put together do not account or even 2 per cent o the consolidated revenues or net worth. Though there have been other cases the company has aced in the international waters, there have been no environmental issues in particular. 21

22 STRENGTHS WEAKNESSES Market leadership in key categories Need based product positioning Strong brands Niche target audience Mass product pricing High A&P outlay Innovative product oerings Need to maintain celebrity endorsement cycle Unlimited pricing power Brand dilution High brand recall Regional players competition In control working capital cycle Healthy cash low S W Exposure to agri related raw materials Not so avorable product mix OPPORTUNITIES O T THREATS Low penetration o key categories Volatile raw material scenario Expanding distribution More MNCs venturing into Ayurveda Overseas operation Appeal or Ayurveda diminishing Cross pollination o technologies Celebrities backtracking on commitments In-organic growth opportunities Increasing media costs Limited MNC competition threat Vulnerable CSD channel 22

23 Rs.bn Rs.bn Emami Financials (1/3) Revenue grew at ~22% inclusive o inorganic Zandu growth FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Despite high A&P, op margins or Emami on the higher side Bajaj Corp 28.5% Colgate 2.8% Emami 2.4% Dabur 16.7% HUL 15.6% GCPL 15.3% Marico 13.6% Jyothy Labs 11.8%.% 5.% 1.% 15.% 2.% 25.% 3.% Gross margin expansion to aid EBIDTA expansion PAT to outpace revenue CAGR 7% 6% 5% 4% 56% 59% 6% 63% 58% 57% 58% 61% 63% 63% % 2% 1% % 24% 24% 24% 24% 2% 2% 2% 16% 17% 13% 13% 16% 17% 18% 19% 19% 21% 21% 21% 11% FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Gross Margin EBITDA Margin PAT Margin FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Source: Spark Capital Research Source: Spark Capital Research 23

24 Financials (2/3) Adjusted EPS has increased 4x in 6 years while net worth has grown ~3x in 6 years Net Worth (Rs.bn) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Source: Spark Capital Research Return ratios has remained robust around 4%... 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 38.8% 27.4% 33.3% 25.9% Source: Spark Capital Research 43.1% 43.5% 39.3% 4.4% 37.5% 39.% 37.1% 37.% 33.1% 34.6% FY1 FY11 FY12 FY13 FY14e FY15e FY16e ROE ROCE Source: Spark Capital Research on a stable working cycle pattern Source: Spark Capital Research FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Working Capital Days 24

25 Rs.mn Rs.bn Rs.bn Emami Financials (3/3) Healthy cash position with debt reduced enough to scout or inorganic growth opportunities FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Cash on books Debt FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e CFO FCF Source: Spark Capital Research Debt/Equity has reduced substantially Source: Spark Capital Research FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14e FY15e FY16e Debt/Equity Source: Spark Capital Research while EVA continues to be on the rise FY7 FY8 FY9 FY1 FY11 FY12 FY13 EVA Source: Spark Capital Research 25

26 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 (Rs.) Emami Valuations & View Valuations and View Valuations and View - The stock has traded at an average o 22.8x on the back o its solid growth strategy and margin expansion levers. We are valuing HMN at 21x FY16E.Diversiied portolio expansion, Strong market leadership in key brands, expansion o the Zandu portolio to be the key long term growth drivers. We believe prolonged subdued Mentha oil prices could present a near term trigger on HMN Investment thesis risk: We acknowledge the act that Emami businesses are largely bound by seasonality. As IN FY14, extension o any particular summer or winter season could hamper near term growth prospects. We understand that mass ocused brands and category o HMN have limited scope o large scale price increases in case o volatile raw material luctuations. Emami P/E Band historically traded at rich valuations HMN has traded at an average o 22.8x Average PE Source: Bloomberg, Spark Capital Research Emami, 12m Fwd P/E +2 sd +1 sd -1 sd -2 sd x 26x 22x P/E Multiple range No. o days traded % o o no. o days Cumulative traded no. o days %o Cumulative no. o days 16-18x 64 4% 68 4% 18-2x % 321 2% x 14x 1x 2-22x % % 22-24x % 13 63% 24-26x % % 26-28x % % 28-3x 25 2% % Total % Source: Bloomberg, Spark Capital Source: Bloomberg, Spark Capital 26

27 Financials Abridged Financial Statements Rs. mn FY13 FY14E FY15E FY16E FY13 FY14E FY15E FY16E Proit & Loss Growth Ratios (%) Revenue 16,991 18,738 21,781 25,294 Revenues 17% 1% 16% 16% EBIDTA 3,473 4,417 5,215 6,132 EBIDTA 17% 27% 18% 18% Other Income ,52 PAT 17% 22% 2% 16% Depreciation Margins (%) EBIT 3,81 4,811 5,832 6,832 Gross 57.9% 61.4% 63.3% 62.5% Interest EBIDTA 2.4% 23.6% 23.9% 24.2% PBT 3,687 4,87 5,776 6,776 PAT 18.8% 2.8% 21.5% 21.4% Normalised PAT 3,196 3,899 4,679 5,422 Leverage Ratios (x) Balance Sheet Debt to Equity Net Worth 7,775 1,151 13,3 16,337 Current Ratio Loan Funds Return Ratios (%) Deered Tax Liabilities RoCE 37.5% 39.% 37.1% 34.6% Sources o Funds 8,931 11,317 14,148 17,491 RoE 43.1% 43.5% 4.4% 37.% Net Block 3,252 4,52 4,928 5,276 Total Asset Turnover (x) Capital WIP Per Share Goodwill EPS (Rs.) Investments 1,973 1,946 1,946 1,946 Dividend (Rs.) Total Current Assets 5,747 7,47 1,76 13,282 Valuation Metrics Total Current Liabilities 3,23 3,335 3,518 3,729 Current Market Price 434 Net Current Assets 2,516 4,135 6,558 9,553 Shares Outstanding (mn) Application o Funds 8,931 11,317 14,148 17,491 Market Cap. (Rs. mn) 98,54 Cash Flow Enterprise Value (Rs. mn) 94,66 93,38 91,213 88,629 Cash Flow rom Operation 3,238 3,321 3,77 4,376 EV /Sales (x) Cash Flow rom Investments (1,236) (372) Price/Earnings (x) Free Cash Flow 2,394 2,276 3,979 4,728 Price/Book (x) Cash Flow rom Financing (1,944) (1,561) (1,94) (2,135) EV/EBIDTA (x) Closing Cash Balance 2,817 4,25 6,281 8,875 Dividend Yield 1.2% 1.4% 1.6% 1.8% 27

28 Absolute Interpretation Recommendation History Stock expected to provide positive returns o >15% over a 1-year horizon Date price Add Stock expected to provide positive returns o >5% <15% over a 1-year horizon Reduce Stock expected to provide returns o <5% -1% over a 1-year horizon Sell Stock expected to all >1% over a 1-year horizon Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its ailiates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. This document does not constitute or orm part o any oer or solicitation or the purchase or sale o any inancial instrument or as an oicial conirmation o any transaction. This document is provided or assistance only and is not intended to be and must not alone be taken as the basis or an investment decision. Nothing in this document should be construed as investment or inancial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities o companies reerred to in this document. Each recipient o this document should make such investigations as it deems necessary to arrive at an independent evaluation o an investment in the securities o companies reerred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks o such an investment. This document is being supplied to you solely or your inormation and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, or any purpose. This report is not directed or intended or distribution to or use by any person or entity who is a citizen or resident o or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its ailiates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible or sale in all jurisdictions or to a certain category o investors. Persons in whose possession this document may come are required to inorm themselves o and to observe such applicable restrictions. This material should not be construed as an oer to sell or the solicitation o an oer to buy any security in any jurisdiction where such an oer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or airness o the inormation and opinions contained in this document. Spark Capital, its ailiates, and the employees o Spark Capital and its ailiates may, rom time to time, eect or have eected an own account transaction in, or deal as principal or agent in or or the securities mentioned in this document. They may perorm or seek to perorm investment banking or other services or, or solicit investment banking or other business rom, any company reerred to in this report. This report has been prepared on the basis o inormation, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would endeavour to update the inormation herein on a reasonable basis, Spark Capital and its ailiates are under no obligation to update the inormation. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its ailiates rom doing so. Neither Spark Capital nor its ailiates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, or views or opinions expressed in this report or the contents or any errors or discrepancies herein or or any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or or any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss o revenue or proits that may arise rom or in connection with the use o or reliance on this report. Spark Capital and/or its ailiates and/or employees may have interests/positions, inancial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure o interest statement in this document. This should however not be treated as endorsement o views expressed in this report:

29 Analyst Certiication o Independence The views expressed in this research report accurately relect the analyst s personal views about any and all o the subject securities or issuers; and no part o the research analyst s compensations was, is or will be, directly or indirectly, related to the speciic recommendation or views expressed in the report. Additional Disclaimer or US Institutional Investors This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as deined in Rule 15a-6 under the Securities Exchange Act o 1934, as amended) only by Decker & Co, LLC, a broker-dealer registered in the US (registered under Section 15 o Securities Exchange Act o 1934, as amended). Decker & Co accepts responsibility on the research reports and US Institutional Investors wishing to eect transaction in the securities discussed in the research material may do so through Decker & Co. All responsibility or the distribution o this report by Decker & Co, LLC in the US shall be borne by Decker & Co, LLC. All resulting transactions by a US person or entity should be eected through a registered broker-dealer in the US. This report is not directed at you i Spark Capital Advisors (India) Private Limited or Decker & Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction rom making it available to you. You should satisy yoursel beore reading it that Decker & Co, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations; Disclosure o interest statement Analyst ownership o the stock Group/directors ownership o the stock Broking relationship with the company covered Investment banking relationship with the company covered Yes/No No No No No